Before we break down how to calculate margin, let's look at where you can find how much margin you have.
In WebBroker, go to Account Balances. If you hold more than one account, you can identify your margin account by looking for an E or F at the end of the account number. E represents the Canadian component of your margin account and the F is the U.S. component.
This number shows your Margin Excess. This is the total margin or borrowing room you have.
Since the values of your investments change from day to day, this number also changes daily. So, it's good to reference it often so you know where you stand. A positive number means you have excess margin that you can use to trade or withdraw funds. A negative number means you're in Margin Call – you're in a deficit and you need to deposit funds or sell some investments immediately to bring your margin into good standing.
You can also see your margin balance in an order entry ticket. This number is real-time and updates whenever money is moving or a trade is occurring in the account. Changing from the Canadian component of the Margin account to the U.S. component of the Margin account also displays your combined buying power, or margin, in that currency for easy reference. Since it's real-time, this is the best number to use when you're calculating margin.
Although a margin account lets you borrow money, you don't have to. If you have enough cash to cover a trade, you can use that. Check here to see your cash balance.
But if you're using margin to buy an investment, here's what you should know first.
Every investment has a Margin Rate and a Loan Value. A simple formula to remember is that Margin Requirement Rate + Loan Value Rate = 100%
Margin Rate is the amount you pay from your own cash, and Loan Value is the amount you're borrowing from the broker. These rates are guided by IIROC, but brokers can set higher margin requirements too. A common rule of thumb is that any large company with a stock price over five dollars has a margin rate of 30 per cent. But be aware that margin rates and loan values can change any time if the stock or market experiences a change, like in volatility or liquidity. So, for example, if a stock is now deemed higher risk, then the loan value might change from 70 per cent to 50 and some may not be marginable at all. To see the list of investments with higher margin requirements, click here.
On the other hand, if that stock were to drop to below three dollars a share, then the loan value would drop to zero per cent. This means you would have to pay 100 per cent of the trade with your own cash.
Now that you know where to find your available margin in WebBroker, you might be wondering how to know how much you can buy with it. This is commonly referred to as your buying power.
For that, we have to look at your Available Margin, the Margin Rate, and the price per share of the stock you want to buy.
Let's say your total Available Margin is 5,000 dollars with no current investments in your portfolio. How many shares of ABC1 stock can you buy if it's trading at 50 dollars a share with a 30 per cent margin rate?
First, 5,000 dollars divided by 30 per cent means that your buying power is $16,666.66 for any 30 per cent marginable stock.
Dividing this number by 50 dollars a share equals 333-point-333. Since you can't buy a fraction of a share, this means you can buy a maximum of 333 shares. It's also a good idea to leave enough margin buffer to pay for any applicable commissions for your trades.
Now, to find out the total cost of the trade, we multiply 50 by 333. This shows that the trade would cost 16,650 dollars. Remember, if you are looking at buying U.S. stocks, use the U.S. dollar equivalent value.
Now, how much would you have to pay in cash and how much would the broker lend you on margin?
To calculate what you would owe, multiple 16,650 by point-three. This totals 4,995 dollars. Remember, because of that fractional share that we dropped, our amount is slightly less than 5,000 dollars plus commissions.
To calculate the loan value, multiply 16,650 dollars by point-seven (the remaining 70 per cent). Alternatively, you can also subtract 4,995 dollars from 16,650 dollars. This results in a loan value of 11,655 dollars.
When placing trades on our platforms, you won't need to calculate the margin requirement yourself as this figure is shown on the order confirmation screen.
If you go ahead and place this trade, your new cash balance will be negative 11,655 dollars and your new margin excess would be zero dollars.
This is an extreme example where we're using every single dollar available. In real life, you may not want to use all your available margin because then you'd leave no room for any downward movement in your investments. Depending on your investing style, you could leave a certain percentage of your margin as an extra buffer. This may give you some room if your investments decrease in value.
In our example, the account's negative cash balance is also known as a settled debit. This means that you're borrowing cash from TD and interest would be charged every single day that the negative balance exists, and you'd be liable for any interest charges. If you do accrue any interest charges, the monthly total is posted to your account once a month. To see what the current margin interest rates are, check out our website.
If your Margin Excess also goes negative, then you'd be in a Margin Call and you would need to fix that right away.
For example, the next day stock ABC1 closed down one dollar at 49 dollars per share. Your loan value will be 333 shares multiplied by 49 dollars per share, and then multiplied by the 70 per cent loan value. This results in 11,421.90 in loan value. Remember, your cash balance is negative 11,655 dollars and you are receiving 11,421.90 dollars in loan. This means your margin will be short by 233 dollars and ten cents and you'll be in a margin call.
It's important to know that as per the margin account agreement, a broker can liquidate your investments at any time to ensure your account is in good standing. So, it's best to monitor and bring your margin back into good standing as soon as you're aware of it.
Monitoring margin details…and taking some time to crunch margin calculations is a good habit to get into before setting out to use margin. If you need a more hands on approach to learn about margin accounts, take a look at our Master Class schedule to sign up for an upcoming live session.
